7 Things To Consider for Successful Corporate Bond Investment
Corporate bond investment provides a source of fixed income and the potential for capital growth. They are debt instruments companies issue to raise funds for various corporate needs, such as research and development, expansion, or buyback of shares. Corporate bonds offer higher yields than government bonds while carrying slightly higher risk.
According to an EY 2023 report, the Indian corporate bond market is primarily under-utilised, at 16% of GDP compared to Asian peers, with South Korea at 87% and China at 36%. According to CRISIL Ratings, the Indian corporate bond market should double within six years, growing from INR 43 lakh crore in FY24 to INR 100-120 lakh crore in FY301. It offers an excellent opportunity for investors.
Investing in corporate bonds can be a great way to diversify your portfolio and earn predictable returns. However, it is essential to understand the risks associated with these investments before diving in. Here are seven things you should consider that can assist you with how to buy corporate bonds:
7 Things To Consider On How To Choose Bonds
1. Understanding Credit Ratings In Corporate Bond Investment
The default risk associated with corporate bonds depends on the issuer's creditworthiness, which is determined by the credit rating. A credit rating represents the likelihood of an entity (company, government) or an investment instrument fulfilling its obligations to repay principal and interest on the due dates. Credit ratings usually follow a graded system, ranging from AAA (the highest rating) to D (lowest).
An AAA-rated corporate bond refers to the highest quality and lowest default risk, while BBB-rated bonds are considered the lowest investment-grade options. Investing in higher-quality corporate bonds offers a degree of assurance that your investment will remain secure for the duration of its maturity.
Investors should check the credit ratings with SEBI-registered rating agencies such as CRISIL, ICRA, CARE, India Rating, Acuite, Infomerics, and Brickwork Ratings to independently assess the risk of investing in a particular corporate bond.
2. Liquidity Considerations Before Buying Corporate Bonds
Before buying corporate bonds, consider how easy they will be to sell should you need money quickly or if market conditions change suddenly. Corporate bonds are typically less liquid than traditional investment instruments like stocks and mutual funds.
However, the rise of online bond-providing platforms (OBPP) like Grip Invest and SEBI regulations on their NSE integration paves the way for easier secondary market transactions.
3. Checking Maturity Dates For Effective Bond Investment
The maturity period of corporate bonds may range from a few months to 30 years. Therefore, it is essential to consider the potential interest rate environment and bond yield curve when selecting corporate bonds with different maturities.
Longer-term corporate bonds are more sensitive to changes in market interest rates than shorter-term corporate bonds. For example, if market interest rates rise after you purchase a bond with long-term maturity, the value of your bond may decrease because it pays lower than the newer bonds being issued at higher yields.
4. Comparing Yields And Coupon Rates In Corporate Bonds
The yield and coupon rate are critical components of a bond's return. The yield is the annual return generated by the bond as a percentage of the prevailing market price. You should compare bond yields of different bonds with different maturities and ratings. You should also compare the yields of corporate bonds with government bonds, the former often offering higher yields.
On the other hand, the coupon rate is the fixed annual interest rate paid by the issuer. Monitoring economic indicators and understanding how changes in interest rates may affect a bond’s yield is also beneficial.
5. Diversifying Your Portfolio With Corporate Bonds
Corporate bonds are a great way to diversify your portfolio and spread risk across numerous investments, considering their non-market-linked nature. To bring further diversification, you could invest in multiple corporate bonds from various issuers to have adequate protection against potential losses or defaults.
Investors can also consider BondX, the first-of-its-kind alternative investment product that pools together investment-grade rated bonds from a curated set of issuers and provides access to investors at a fractionalised investment amount. It is a diversified, SEBI-compliant, and credit-rated instrument for individual investors.
Additionally, it is essential to consider how much of your portfolio should be allocated to corporate bonds. It ensures a well-balanced portfolio with enough liquidity and protection against any losses arising out of potential default.
6. Ensuring Security in Corporate Bond Investments
Various types of corporate bonds entail different levels of security. Secured bonds are backed by collateral, such as real estate, equipment, etc. If the issuer goes bankrupt or fails to repay a loan, the underlying assets can be used to recoup the bondholder’s losses.
On the other hand, unsecured bonds are not backed by any tangible asset. There is no legal guarantee that holders will get their money back if the issuer defaults on its debt obligations. Therefore, it is essential to carefully research whether you are investing in secured or unsecured corporate bonds before making any investment decisions.
7. Choosing The Right Bond-Providing Platform For Investors
Stocks are traded on the stock exchanges via brokers. As a retail investor, if you are wondering how to invest in corporate bonds in India, the answer is through Online Bond-Providing Platforms. OBPPs are SEBI-registered companies that provide retail investors with a secure gateway to invest money in bonds. OBPPs are usually backed by stock brokers or fintech(s). They offer comprehensive e-platforms for executing secure transactions in fixed-income instruments like bonds and non-convertible debentures to retail investors
Conclusion
With the proper knowledge, research, and strategy, investing in corporate bonds can be a valuable addition to your portfolio. Keep in mind the seven essential points when making investment decisions.
Ensure you understand the risk associated with the bond issuer, research credit ratings and market trends, assess the liquidity levels of the bonds and prepare for interest rate fluctuations. With this information, you can make confident and wiser investments in corporate bonds.
Explore Grip Invest, a SEBI-regulated online bond-providing platform that offers a curated list of investment-grade bonds. Make informed investment decisions with Grip Invest.
Frequently Asked Questions
1. What are investment-grade corporate bonds?
Investment-grade corporate bonds are debt instruments issued by established businesses to raise capital and provide investors with fixed-interest payments. They are considered less risky and more stable as they are associated with well-known corporations and have assigned credit ratings of BBB or higher by the major credit rating agencies.
2. What are the risks of investing in corporate bonds?
Investing in corporate bonds comes with
- Credit or default risk
- Interest risk
- Inflation risk
- Liquidity risk
3. Are corporate bonds worth investing in?
Corporate bonds are viable investment options if you wish to diversify your portfolio and beat the market volatility. The risks associated with investing in them can be managed through careful research and assessment of the issuer's creditworthiness.
References:
- CRISIL Ratings <https://www.crisilratings.com/en/home/newsroom/press-releases/2023/12/corporate-bond-market-to-more-than-double-by-fiscal-2030.html>
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